UPS Q1 Earnings Recap

Following through from April's pre-announcement, PARCEL asked Doug Kahl, Vice President of TranzAct Technologies to report on this morning's UPS Press Release and Earnings Call on their first quarter results.

The headline from the press release reads, "International Profit up 45%; Margin Expansion in all Segments." Scott Davis, CEO and Kurt Kuehn, CFO presented a detailed summary of the quarterly results and answered analysts questions in-depth. Here is a recap on a segment-by-segment basis:

U.S. Domestic Package

More detail was given this morning then was released in last week's pre-announcement. Segment revenue was $7.1b, up 2% from last year's $6.95b; adjusted Operating Profit increased 17%; adjusted Operating Margin gained 1.2% moving from 8.1% up to 9.3%; while average volume per day showed a slight gain, moving from 12.68m up to 12.73m. Reiterating what was mentioned last week, this is the first year-over-year increase in domestic volume reported in over two-years.

The improved yield numbers were attributed to higher fuel surcharges (see chart below for a month-to-month comparison) and improved retention of base pricing. Look for pricing discipline to continue throughout 2010.

Fuel Surcharge Comparison
                              2010                               2009
                          Ground    Air                   Ground     Air
January              5.00%   7.00%              4.75%     7.50%
February            5.00%   6.50%              3.25%      1.00%
March                 5.50%   7.50%              2.75%      2.50%

The implied expectation from the call is that ground will outperform express. Although the weight per express package is up slightly, document traffic was down. With Worldport expansion in place, UPS is able to improve air network efficiency and has the capability to ramp-up additional capacity, leveraging growth.

U.S. economic recovery is still slow. Looking for Q1 GDP growth of 2.5% and anticipate overall 2010 growth near 4%.

International Package

The highlights from the pre-announcement focused on this segment. UPS reported growth across all geographies from both current customers and from winning new business. During the Q&A they mentioned sales initiatives were put in place to help drive market share offshore through "conversion sales" and "increase share of wallet."

Further clarification was given that the 24% non-U.S. domestic volume growth was driven by the acquisition in Turkey in the third quarter of last year, as well as 13% organic growth, powered by the strength in core European countries.

Discussion of the Iceland volcano and its impact on results- The extensive UPS ground network allowed the continuation of pick-up and delivery services throughout Europe during the April 14-20 period. On April 21, the air hub in Cologne re-opened; volume was on par with peak season as they moved freight through the system. Look for further clarification on the impact of this event when Q2 results are announced.

Supply Chain and Freight

Each business unit in this segment recorded revenue gains. Forwarding and Logistics up 16%, Freight posted a 6% revenue gain driven by a 10% increase in revenue per hundredweight.

Logistics group is the driver with programs targeting healthcare and high tech verticals. Forwarding had strong tonnage increases with revenue management plans in place to manage yields. LTL showed solid improvement but is still not out of the woods. UPS stated that they will stay with rational pricing and they expect UPS Freight to be profitable in 2010.

Takeaways for shippers

Rational pricing, pricing discipline, price for value, call it what you will; the tenor has changed from a buyer's to a seller's market. How you present your book of business will increasingly have an impact on your contractual rates. Domestic ground appears to be growing again yet the desire to move more express volume (at the right price) is evident. Mention of offshore sales initiatives is an indicator that multi-national companies have a window of opportunity. And the importance of managing purchased transportation costs, especially in the logistics and forwarding segment, presents further opportunity to shippers who share accurate volume forecasts. Having visibility to data and pre-planning to increase efficiency can provide a payoff for you.